Google, Amazon Show Investors Cost Control Is Key for Tech

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Investors have started to reward Internet companies that can show both financial discipline and a path to long-term growth, making Amazon.com Inc. and Google Inc. the clear winners of the technology earnings season.

Google kept costs in check in the second quarter, and shareholders cheered with a 16 percent stock gain after the search giant released better-than-expected results. Amazon also surged after posting a surprise profit, demonstrating that the Web retailer is capable of making money when it puts a brake on spending.

“Internet investors are focused more on growth in users and revenue,” said Paul Sweeney, an analyst at Bloomberg Intelligence. “Amazon is the best example of this investor mindset. However, whenever a company throttles back its expenses and drives profits, as Amazon and Google did this quarter, investors are pleased and drive the stock higher.”

By contrast, Facebook Inc., which vowed to keep its brisk pace of investments to lure users and advertisers, fell as Chief Executive Officer Mark Zuckerberg was short on details about money-making plans for the company’s newer initiatives, like WhatsApp and Oculus. LinkedIn Corp. and Twitter Inc. slumped over concerns that user growth is slowing. Microsoft Corp. posted its largest-ever quarterly loss. And Apple Inc. failed to meet analysts’ predictions for iPhone sales and growth for the current quarter.

“The second quarter was very much a mixed bag,” Sweeney said.

Advertising Winners

Technology companies in the Standard & Poor’s 500 Index beat analysts’ earnings estimates at a 71 percent pace so far in the season, data compiled by Bloomberg show. The rate is lower than for the entire S&P 500 Index -- at 74 percent -- with notable misses including Yahoo! Inc. and Oracle Corp.

“The big players in digital advertising are winning, which are Google and Facebook,” said John Fox, director of research at Fenimore Asset Management Inc. in Cobleskill, New York, who helps oversee more than $2 billion. “They’re doing very well. A lot of the smaller digital companies are not doing well.”

Here’s a look at the companies:

Google, Amazon

Google’s shares surged after Chief Financial Officer Ruth Porat signaled plans to bring more restraint to spending at the Internet search giant.

“The priority is revenue growth,” Porat said on a conference call after the report, her first at Google. “We have a breadth of opportunity, but pursuing revenue growth is obviously not inconsistent with expense management.”

For Amazon, a day of sales on July 15 to mark the company’s 20th anniversary, called Prime Day, exceeded expectations. The promotion, designed to drive Prime membership signups, generated orders surpassing Black Friday, the annual U.S. sales event that kicks off the year-end holiday shopping season. Revenue for the company’s cloud-services business rose 81 percent year over year, and 49 percent from the previous quarter.

On the cost side, operating expenses grew slower than sales, rising 17 percent to $22.7 billion, Seattle-based Amazon said. Spending on marketing and fulfillment centers were unchanged as a percentage of sales compared with a year earlier, according to Brian Olsavsky, Amazon’s chief financial officer.

Facebook, Microsoft

Facebook reported second-quarter revenue that beat analysts’ estimates, but investors were disappointed by the growth of the company’s applications that could be making billions on their own. The focus for the three apps -- WhatsApp, Instagram and Messenger -- was still on expanding their communities, Zuckerberg said. Messenger has 700 million users, more than double the size of Twitter Inc.; WhatsApp has 800 million; and Instagram has more than 300 million. Instagram started to sell advertising, but it’s not going to have an impact on Facebook’s bottom line for a long time, Chief Operating Officer Sheryl Sandberg said.

Microsoft posted its largest-ever quarterly loss and offered a disappointing sales forecast. Net loss amounted to $3.2 billion due to a $7.5 billion writedown of Microsoft’s Nokia handset unit.

While revenue from Microsoft’s cloud-computing business rose, sales of Windows to PC makers and corporate customers sagged. The writedown was an acknowledgment that the Nokia deal had lost almost all its value after failing to rescue the company’s smartphone business.

Microsoft shares fell 3.7 percent the day after the company reported, the biggest single-day decline since late January.

Twitter, LinkedIn

While Twitter’s second-quarter sales topped analysts’ estimates, the company posted disappointing numbers on user growth. Chief Executive Officer Jack Dorsey and Chief Financial Officer Anthony Noto took a critical tone on the pace of expansion on their earnings call with analysts, saying they have a lot of work to do and don’t expect significant progress anytime soon.

LinkedIn increased its annual revenue forecast, topping analysts’ estimates, but said most of the gain will come from the acquisition of the education website Lynda.com. Shares of the professional-networking website slumped on concerns that the company’s core growth areas were slowing.

“The bar has been high for technology companies this season,” said Dan Veru, who helps oversee $4.5 billion as chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC. “LinkedIn is a perfect case in point. The bar was high, but investors didn’t like the way they beat it because they beat it with an acquisition closing.”

Investors are concerned about LinkedIn’s core business and “what it really is,” Veru said. “That’s why the stock is down,” he said.

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